Illinois offers Internet ‘use’ tax amnesty to consumers

Experts say the state is the first to offer such a break to consumers.

In what is apparently the first move of its kind by a state, Illinois is offering an amnesty program to individual consumers for unpaid taxes on Internet purchases.

The amnesty program, which will run from Jan. 1 through Oct. 15, will waive all penalties and interest on payments individual taxpayers pay the state on so-called “use” taxes that went unpaid on purchases made between June 30, 2004, and Dec. 31, 2010, from Internet, catalog and any other retailers that didn’t collect sales tax on those purchases.

Use taxes are levied by Illinois and other states in lieu of sales taxes. They are called use taxes because individuals are supposed to pay for the right to use within a given state products purchased from Internet and catalog merchants that don’t collect sales tax on behalf of that state. But most consumers aren’t even aware of use taxes and few ever pay them, tax experts say.

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The Illinois Use Tax Amnesty program is an effort to call attention to consumers’ use-tax responsibility and help recoup what the state estimates is at least $150 million a year in uncollected tax revenue, a spokeswoman for the Illinois Department of Revenue says. “We’ve been trying for years to raise awareness of taxpayers’ responsibility to pay use tax,” she says, “but knowledge of use tax is still minimal at best.”

Several states participating in the Streamlined Sales Tax Project have offered amnesty programs to retailers for uncollected sales tax, but the Illinois Use Tax Amnesty program apparently is the first of its kind offered to individuals, says Daniel Schibley, a state tax analyst at CCH, a unit of Wolters Kluwer that publishes tax and business information.

Illinois is also taking a step already taken by several other states in requiring individual state taxpayers to fill out a line in their state tax return to estimate their liability for use tax. In the Illinois 2010 state tax return form, taxpayers will have the option of either using a worksheet to estimate their use tax liability or simply pay about $3 per $10,000 of adjusted gross income. “If everyone pays their $3 per $10,000, it’s a lot of money for the state,” the spokeswoman says.

The Oklahoma Legislature earlier this year discussed having a use tax amnesty program for individual taxpayers, but decided to go with a more easily managed program based on educating consumers about their use tax responsibility and making it simple for them to pay the tax, says a spokeswoman for the Oklahoma Tax Commission, the state’s revenue department.

In recent months, the state has launched tax.ok.gov, where Oklahoma taxpayers can figure and electronically pay their use tax, and begun working with online retailers to get them to inform their Oklahoma residents about their responsibility for paying use tax. Retailers including Amazon.com have cooperated, she adds.

Oklahoma wanted to drum up awareness of use taxes during the holiday shopping season, though isn’t expecting an immediate windfall in tax revenue, the spokeswoman says. “We feel the education will help—maybe not this year, but next year,” the spokeswoman says. “Many people understand taxes are needed to pay for state services, and if they recognize they need to pay use tax, they’ll cooperate.”